Abstract: We examine micro and macro productivity differences across nations using cross-country firm-level data and a quantitative model of misallocation that integrates firms' operational (selection) and investment (technology) decisions. Empirically, less developed countries display greater distortions and wider dispersion in firm productivity, driven largely by the higher prevalence of low-productivity firms. Quantitatively, cross-country differences in measured distortions account for most of the observed micro-level patterns and over half of aggregate labor productivity gaps. Both selection and technology channels are essential to matching the data, while static misallocation also plays an important role, albeit smaller.
Keywords: Firms, productivity, size, distortions, misallocation, selection, technology.
JEL Classification: O11, O14, O4.